Company Reports

We recommend shareholders of no-moat Virgin Money vote in favor of Nationwide Building Society’s takeover proposal at the general meeting on May 22, 2024. Nationwide’s offer of GBX 220, or about AUD 4.21 per Virgin Money share, comprises a GBX 218 cash consideration plus a GBX 2 unfranked dividend, which values Virgin Money at GBP 2.9 billion, or approximately AUD 5.6 billion. Payment of the dividend is part of Virgin Money’s ordinary dividend distribution schedule for fiscal 2024 and is not conditional on the scheme becoming effective.

Virgin Money UK (LSE: VMUK; ASX: VUK) consists of the CYBG business (demerged from National Australia Bank), and the Virgin Money brand in the UK The CYBG merger with Virgin Money UK virtually doubled the size of the bank's loan book and provided a foothold in the larger and faster growing London region. The bank's loan book is split 80% mortgages, 12% business loans, and 8% personal (including cards). We estimate Virgin has under 5% of the mortgage market, with its market share in Scotland and Yorkshire, closer to 10%. In cards, market share is higher at around 8%.

Virgin Money, the sixth-largest bank in the UK, appears likely to be acquired by Nationwide Building Society, with the parties reaching a preliminary agreement. The GBX 220 consideration appears fair in our view. It is a 5% premium to our stand-alone fair value estimate for no-moat Virgin Money, and a considerable 38% premium to the share price prior to the announcement, which has languished for years. The consideration comprises a GBX 218 cash payment plus a GBX 2 dividend.

Virgin Money’s first-quarter 2024 trading update aligned with our expectations. This includes a relatively steady loan book, flat net interest margins, or NIM, bad debt expenses tracking our full-year forecast, and well-managed costs against ongoing inflation. The decline in mortgages was offset by growth in business and personal lending, which is not surprising given competition from larger banks in mortgages and Virgin’s aim to diversify the loan book. Management’s full-year guidance for NIM of 1.9% to 1.95%, cost/income ratio broadly stable at 52%, and bad debts/loans up to 0.35% are unchanged. Our fiscal 2024 forecasts remain largely within guidance, and despite a good start in the first quarter, assume a slightly higher cost/income ratio for the year.

Virgin Money UK (LSE: VMUK; ASX: VUK) consists of the CYBG business (demerged from National Australia Bank), and the Virgin Money brand in the U.K. The CYBG merger with Virgin Money UK virtually doubled the size of the bank's loan book and provided a foothold in the larger and faster growing London region. The bank's loan book is split 80% mortgages, 12% business loans, and 8% personal (including cards). We estimate Virgin has under 5% of the mortgage market, with its market share in Scotland and Yorkshire, closer to 10%. In cards, market share is higher at around 8%.

Virgin Money’s fiscal 2023 preprovision profit missed our forecast by around 8%. Costs and bad debts came in at the top of guidance ranges, and noninterest income was modestly weaker than we forecast. Benefiting from higher cash rates, net interest margins climbed 6 basis points to 1.91% on flat loan balances. Preprovision profit increased 9%, with underlying profit down 24% as bad debts rose toward more normal levels. The increase in bad debts reflects more provisions taken for future losses, with credit stress still low.

Virgin Money UK (LSE: VMUK; ASX: VUK) consists of the CYBG business (demerged from National Australia Bank), and the Virgin Money brand in the U.K. The CYBG merger with Virgin Money UK virtually doubled the size of the bank's loan book and provided a foothold in the larger and faster growing London region. The bank's loan book is split 80% mortgages, 12% business loans, and 8% personal (including cards). We estimate Virgin has under 5% of the mortgage market, with its market share in Scotland and Yorkshire, closer to 10%. In cards, market share is much higher at around 8%.

No-moat Virgin Money’s first-half fiscal 2023 result was weaker than our expectations, largely on higher operating expenses and bad debts. Profit before bad debt expenses increased 5% on the second half of 2022, with revenue growth modestly outpacing expenses. Like in the first quarter, an improvement in net interest margins, or NIMs, and virtually flat loan balances drove the top line. The cost/income ratio of 51% in the first half was heading in the right direction, but guidance of 51%-52% for the full year is higher than the 50.5% we originally forecast. We now expect cost/income of about 51% for fiscal 2023, increasing our fiscal 2023 expense forecast by around 3.5%.

Virgin Money’s first-half fiscal 2021 underlying pretax profit of GBP 245 million basically doubled on first-half fiscal 2020, but almost entirely as loan impairment provisions obliterated profit last year. Net interest margin, or NIM, was a little better than expected at 1.56% and is guided to be 1.6% for the year. Non-interest income fell 43% to GBP 66 million as lockdowns slowed activity. Our full-year forecast for non-interest income is cut by 17% to AUD 135 million, but we still expect a recovery in the medium term as customer activity returns across both consumer and business customers. Impairment losses in first-half fiscal 2021 of GBP 38 million represents just 0.05% of loans, tracking better than the 0.4% we had forecast for the full year. We now forecast loan impairments of 0.1% of loans for the full year. After revising up our short-term NIM estimates and reducing our loan loss assumptions over fiscal 2021 and 2022, we increase our fair value estimate by 6% to GBP 1.80 and AUD 3.20.

The history of Virgin Money UK dates back to early 2016, when National Australia Bank demerged its U.K.-based operations in Clydesdale Bank and Yorkshire Bank. Both these banks (known collectively as CYBG) were part of a U.K. holding company, known as CYBG PLC. National Australia Bank shareholders received 75% of CYBG stock and the remaining 25% was sold to institutional shareholders. The demerger implementation date was Feb. 8, 2016. The IPO price equated to a market capitalisation of approximately GBP 1.58 billion (or AUD 3.22 billion). CYBG's primary listing is the London Stock Exchange, with a secondary listing of fully fungible CHESS Depository Interests on the ASX.